Currently, a significant issue in the business sector is the problem of late payments between customers and suppliers. While legislation has been enacted from time to time, for example, in the U.K. and in Europe, there has been no legislation that is reckoned to solve the problem. An ideal solution to the problem would give commercial benefits both to the customer and the supplier. Such a solution should work for both customers and suppliers, as against a system or any sort of arrangement which might meet with or involve, for example, the supplier complaining about the customer or demanding financial compensation from the customer. Typically, if the customer pays earlier than the agreed invoice settlement date, then liquidity decreases for the customer, and the supplier has benefited. Conversely, when the customer pays later than the agreed settlement date, then the customer's liquidity increases and the supplier's liquidity decreases. Any solution to the late payments problem must be mutually attractive to both customers and suppliers and provide an answer to the conundrum of how to improve the liquidity of both the supplier and the customer.
Attempts to address the problem of late payments have been made in the world of paper. The essence of such a paper-based system, for example, in Spain, is that when a Spanish supplier sends goods through to its customer and subsequently sends the invoice, then along with the invoice is sent another paper instrument which is similar to a promissory note. This paper instrument is a very simple form of bill of exchange, which is accepted by the customer for the value of the invoice and is sent back to the supplier. It is for the amount of the invoice and is normally expressed as maturing in a predetermined period, such as 90 days. The paper instrument then goes into circulation as a paper instrument from the supplier, for example, to the supplier's own supplier. In other words, the supplier can pass it on to its own supplier as means of settlement of indebtedness, so it moves as an instrument of value.
As the instrument in the example is paper, it is not divisible. More importantly, as it flows through the business community, each recipient has to form a judgment as to the credit worthiness of this particular note, and some, of course, go into default. The way the instrument is processed is that when it reaches maturity, then the holder for value at that time presents it via the holder's own bank. Thus, the instrument finds its way back to the banker of the issuer, which is then either paid, or it goes into a default mode, or is protested under Spanish law. However, such paper instruments have a number of problems associated with their use, such as difficulties in transferability. They are not deliverable, and they are not really in any sense fungible, mainly because they are a wholly disparate credit family.